Munis Unchanged to Slightly Firmer

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The municipal market was unchanged to slightly firmer yesterday.

"There's a little firmness out there, but overall not much is going on," a trader in Los Angeles said. "I'd say it's about one basis point better on the whole, if that. But it's quiet, and there's not a whole lot trading."

The Treasury market showed gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.84%, finished at 3.81%. The yield on the two-year note was quoted near the end of the session at 2.34% after opening at 2.38%. The yield on the 30-year Treasury finished at 4.44% after opening at 4.52%.

"It's a typical Monday in August, not very much going on," a trader in New York said. "I think the crux of the conversation has been more about the Olympics than munis."

In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that the "strong dichotomy in the strength of institutional demand between the very strongest paper and everything else has persisted."

"Institutions are favoring double-A or better paper without bond insurance, often shunning even the three triple-A rated insurers," Friedlander wrote. "Virtually everything else is left for the household sector to absorb. In our view, this pattern has generated some relative bargains in portions of the market the institutions don't want, including medium-quality revenue bonds and bonds backed by the remaining triple-A insurers," Berkshire Hathaway Assurance Corp., Financial Security Assurance Inc., and Assured Guaranty Corp.

Friedlander also wrote that he is "curious to see how much new-issue volume picks up in September, as we expect it to do, and how well the muni market handles that paper."

"We continue to observe the severe lack of balance-sheet availability at many dealer firms, which is causing unsold balances on some deals to trade very cheaply, particularly on smaller, competitive deals that fly under the radar screen of large institutions," he wrote. "We expect some of these types of pressures to increase as new-issue volume rebounds after Labor Day.

Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report that the municipal market has "run strongly so far in August, fed mostly by demand from individuals either receiving reinvestment funds or re-allocating away from the stock market."

"Cumulative weekly net flows into tax-exempt mutual funds over the last six months are very close to the recent record, set just before the credit crisis," he wrote. "This has allowed muni sellers to evolve out of their concessionary position at the end of July, and as of Friday, the first ten maturities appear aggressively priced versus demand."

"There has also been discussion of increased hedge fund and/or arbitrage investor buying," Fabian wrote. "This would be consistent with what we see as reasonable expectations for a weaker Treasury/LIBOR market, noting the likely recession-related increase in near-term U.S. government issuance and a surge in corporate and structured finance sales after Labor Day."

There will be a significant and noticeable bulge in note issuance this week when a $6.4 billion Texas note deal makes its way to the municipal market amid the dog days of summer.

The Texas tax and revenue anticipation note sale - which is the state's largest since it sold $6.6 billion in 2004 - should appeal to money-market fund managers and retail investors eyeing the short end of the market. It will anchor this week's primary market, which is expected to see an estimated $5.90 billion of long-term volume, and surpasses last week's total revised long-term volume of $5.52 billion, according to Thomson Reuters.

This week's deal will be sold in the competitive market today and, due to the state's strong economy marked by rising employment and increasing sales taxes, has garnered top ratings from all three major rating agencies - MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F1-plus by Fitch Ratings.

Switching gears to the long-term market, the largest deal on the negotiated calendar will be a $912.1 million Arizona Health Facilities Authority revenue sale on behalf of Banner Health.

Morgan Stanley is expected to price the offering tomorrow with ratings of AA-minus from Standard & Poor's and Fitch, with serial maturities ranging from 2009 through 2038. Proceeds from the sale will finance hospital acquisition, construction, and expansion projects, as well as refund Series 2002 A to C sold by the authority on behalf of Banner Health, and Series 1999B, which was issued by Arizona's Mesa Industrial Development Authority on behalf of Discovery Health System.

In the new-issue market yesterday, Merrill Lynch & Co. priced $176.6 million of public improvement bonds for Palm Beach County, Fla. The bonds mature from 2009 through 2028, with term bonds in 2033 and 2038. Yields range from 2.14% with a 4% coupon in 2010 to 4.96% with a 5% coupon in 2038. Bonds maturing in 2009 will be decided via sealed bid. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's, and AA-plus by both Standard & Poor's and Fitch.

The economic calendar was light yesterday. However, a slate of economic data will be released this week. Today, July housing starts and July building permits will be released, in addition to the July producer priced index and the PPI core for July. Then, Thursday, initial jobless claims for the week ended Aug. 16 and continuing jobless claims for the week ended Aug. 9 will be released, along with the composite index of leading economic indicators for July.

Economists polled by IFR Markets are predicting 950,000 housing starts, 925,000 building permits, a 0.5% rise in PPI, a 0.2% increase to the PPI core, 448,000 initial jobless claims, 3.400 million continuing jobless claims, and a 0.2% dip in LEI.

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